6 out of 7 of the startups with us at StartupYard 2014 are at least partially B2C businesses, and as they pitch their products to potential investors next week at our demo day, few metrics matter more than their projections of how many users they will gain within the next 6 months.
But therein lies the rub. How does a startup with essentially zero confirmed users make a reasonable claim to its future size, six months down the road? This is an area in which startups tend to get a bit fanciful and creative with their numbers, seeing trends and growth curves that aren’t justified by the numbers.
If my user numbers doubled last week from 10 to 20, then I should reasonably predict that by week 26, I will have just under 336 Million users! Depending on your sense of what’s reasonable. Or I could as easily predict that I will have just under 26 users. Regardless, I can be very sure that the real number will fall somewhere in the middle.
Startups need to be both ambitious, and realistic about their growth projections, setting a plan into place which will, if followed, and if based itself on reasonable and provable assumptions, will deliver the numbers they promise to investors, and which they need to survive.
Noah Kagan of Mint.com, discusses this process in his informative blog. He points out that the only workable approach to gaining users is to work backwards from a clearly defined goal, breaking down the channels and methods of user acquisition, their costs and their timescales, into one simple to follow spreadsheet. And while his own projections of how Mint.com would reach 100,000 users in 6 months seem wildly optimistic (including a 25% conversion rate from sponsored adds on Digg.com, with a CTR of 10%), this type of planning actually brought Mint a million users in that same period. Our director at StartupYard, Cedric Maloux, required the same projections from the teams here, so that they could begin thinking about how they could acquire users, and where they might come from.
The Assumption Spreadsheet
Before launching, it’s important to relate your marketing goals to your assumptions. If your goal is, say, 30,000 users within the first six months after launch, you’ll have to justify that growth with something more than faith. You’ll have to show how you assume it can be done. Catalogue and quantify your methods of getting this growth, in ways that can be tested quickly and definitively, including the costs of acquisition per user.
Your assumptions for marketing costs might look something like this:
Cost Total: $56,000 User Total: 33,000
Your assumption spreadsheet is *more* than just a plan for user acquisition, or a marketing plan, so this is just a part of a much larger set of assumptions. Other factors include your churn rate, your pricing, your internal growth costs, and many other items. But everything should relate back to basic assumptions that can be challenged and adjusted before launch.
An interesting side of effect of this thinking process, is that you can start to immediately identify which of your assumptions are wrong, or which are questionable. Which of these above channels is really worth more to your immediate growth potential? While you may not have tested these assumptions, you can make conservative estimates of how much each of them will cost you, and find efficiencies that you may not have been aware of.
For example, my spreadsheet above has a few obvious problems. First, I’ve obviously fallen in love with the idea of “native advertising,” or the kinds of ads that fit in with the content of a given site. This makes sense, as I am personally a fan of this type of advertising. But by scrutinizing the spreadsheet, I can see that native advertising is predicted to cost me $40,000 out of a total marketing budget of $56,000, or 71% of my budget. Despite that, only 58% of my users will come from native ads. They will cost me a lot, and will not be as valuable as the users I gain from Google Ads, or even direct email marketing.
Have an Answer
It’s not necessarily wrong that I would spend 70% of my marketing budget on native ads, when they will only bring me 58% of my users. But these are the kinds of details that investors will pounce upon when they are shown your user projections. You need to have an answer for why you would pursue that avenue of user acquisition over another. For example, perhaps these users are of a higher value (they buy more expensive products), or perhaps they are likely to stay with your product for longer. Perhaps the market for your product in Google ads won’t give you that same CPC if you spend twice as much on them. The size of the market may not justify a bigger focus on Google ads over native ads.
The important point to remember is that you need to have these questions answered, and the relevant data to back up your assumptions, before you launch, and they should be included in your assumption spreadsheet.
The Dilemma of Honesty over Ambition
“How big is your mountain?” That’s the metaphor Cedric Maloux uses often to describe this process of reconciling ambition with the need for some realism, even in the growth phase of a startup. Ambitions to reach 1 billion users are great, if your product is the kind of thing 1 billion people can get some value from at the same time. Not many products are like that, which is why most don’t have the chance to grow that big. But perhaps your mountain isn’t made of a massive user community. Perhaps it’s made of a smaller, quality user base, that pays a reasonable but significant amount to use your product, and gets a disproportionately large value out of it. In either case, your first six months should represent the first “summit” of your mountain. Within that time, with the help of investors who understand and support your journey, you should reach a goal that is both ambitious and achievable, and you should gain valuable understanding of your potential users, the market pressures and demands, and the methods that work in acquiring your ideal users.
This roadmap also serves as a reality check. The assumptions you make today about your revenue (your revenue should be a function of the number of users you have), will be affected by the results of each of these predictions. Suppose your media CTR is 3 times higher than you anticipated? Or your Google ads fail to gain traction? You will know that perhaps the media is a good source of revenue, and that your Google ads need more work. You may also more accurately know what is reasonably achievable, given a certain budget. Your revenue projections need to scale according to the success of these predictions.
Justify the Impossible : Control the Conversation
While the assumption spreadsheet functions as a roadmap for growth, it also works as a roadmap of your thinking for investors and potential partners. Blind ambition, particularly when you’re asking for money, is not an attractive quality. But qualified ambition, in which you set hard goals for yourself, but also show how achieving those goals can be possible, can be very enticing to investors.
Imagine two founders who have essentially identical products. Both will meet with investors. One does not prepare these predictions because, as he says, “you just can’t know what will happen.” The other makes predictions, each representing his ambitious plans to achieve benchmarks in user acquisition. One of these two has something real to talk about with the investors. The other doesn’t. To define the conversation and lead it, you have to make statements that you can back up. Instead of having investors question your ideas, have them question your predictions. They’ll be speaking in your terms, rather than theirs. If you’re comfortable with your numbers, and have thought them through, that confidence will translate to credibility.